Experts: Problems on Wall Street are no reason to panic

Published: Sunday, September 21, 2008

CHRIS VAN WAGENEN

From credit default swaps to collateralized debt obligations - it's all an alphabet soup mix to the average Lubbockite.

But last week's meltdown that required federal intervention - including the bailout of mortgage giants Fannie Mae and Freddie Mac topped by a government announced "troubled-asset relief program" that will eventually cost taxpayers hundreds of billions of dollars - was something everyone could see.

So what should consumers be concerned about?

"It depends on your risk tolerance," said Brian Korb, an associate professor of financial planning at Texas Tech's College of Human Sciences.

He said those losing sleep over the stock market should probably think about readjusting their investments into financial instruments that are less prone to the ups and downs that can shake the foundation of Wall Street.

"The key is not to panic. Don't let your emotions make your decisions. Most people are in it for the long term. If you have a stock position now, you might even want to add to them, assuming you don't need (the money) in the next five years," he said.

Korb said Wall Street typically goes through economic cycles about every four years and that what's been going on lately is no different.

Harold Evensky, president/principal of Coral Gables, Fla.-based Evensky & Katz Wealth Management, said while last week's events that unfolded on Wall Street were unique in the breadth of the implosion, there have been other spectacular-sized meltdowns.

"It's happened before," Evensky said, referring to the dot-com tech bubble in 2000 and Black Monday in 1987. "If you're diversified in your 401(k), the companies you've invested in are still in business the last time I looked. If they're not, there's nothing you can do about it anyway."

Katz, an adjunct graduate professor who teaches weekends at Tech's

Division of Personal Financial Planning, said: "We think it's going to take about a week or a month to get through some of this craziness. It's going to take some time, but the world will be a better place."

Scott Hein, Texas Tech's Robert C. Brown chairman in finance and director of Tech's School of Banking, said the problem on Wall Street is a multi-layer one with no easy solutions.

Hein said the mess can all be tracked to the mortgage market, where home ownership was promoted at any cost by the federal government, regardless whether a person could actually afford it.

He said blame can be cast from Capitol Hill all the way to the bottom, where even outright mortgage fraud became problematic.

"As I've told my students, we had large (financial/investment) institutions out there who were picking up nickels in front of a steam roller," he said.

Hein said what's now going on in the market is therapeutic as Wall Street washes the "toxic waste" out of the system, in particular billions of dollars in worthless mortgages that currently sit on the books of large regional banks and even larger investment houses.

"This is a life lesson that's being unfolded in front of us," he said.

Late last week, Treasury Secretary Henry Paulson said Congress must enact a troubled-asset relief program that would take some of the bad mortgage paper off the books of the financial institutions.

Paulson made it clear the plan will be an expensive one, adding that doing nothing would cost more.

McDonald pointed to the case of insurance giant AIG, where the government was forced to toss a stern life preserver in the form of an $85 billion loan.

"They've been afraid that if one of these links goes down, everything goes down," he said.

McDonald said for investors who have uncertainties about the market, much depends on their time horizon.

"If you have a short one (i.e. approaching retirement) and you can't handle the volatility, you're probably better off re-balancing your accounts ... But you can't get sucked into the emotional highs and lows," he said.

Corey Newsome, senior vice president and chief operating officer for City Bank in Lubbock, said customers shouldn't worry about their bank accounts because of the Federal Deposit Insurance Corp. protection.

"I think you'll see a flight to banks. FDIC coverage is very important to people. This is a Wall Street problem, not a Main Street one," he said.

Greg Garrett, president of Platinum Bank, said during the course of the week, he saw customers making a move into cash.

"Some individuals just don't want to be in the market. From my perspective, I just think people have trust in banks."

Garrett said that's particularly true in Lubbock, where many of the banks are locally owned and in good condition.

"Do I think people are concerned? Sure I do, but Texas and Lubbock just hasn't had to deal with some of the economic issues (facing other parts of the country," he said.

Barry Orr, chairman of First Bank & Trust, whose PrimeWest Mortgage Corp. arm is one of the largest originators of home mortgages in Lubbock, said local community-owned banks will benefit from Wall Street's turmoil.

Orr said Wall Street's cavalier attitude was of its own doing - running amuck in an unregulated atmosphere.

"This is going to level the playing field out there," he said, adding that investment banks will soon have to play by the same rules regulated traditional institutions have long endured.

"People like to see structure."

Agreeing with that sentiment was Greg Jones, executive vice president at American State Bank.

"This is going to shift business back to the way it was five or six years ago," he said.

Tech's Korb said once the stock market bottoms out, the upswing comes and comes quickly.

"This is not the first time we've seen something like this and it won't be the last. A lot of this began with the consumer. We're never content about what we have. We always want more and we want it now," he said.